Income Inequality and the Share of Value Added of Industries: The Role of Production Factors Intensity in Iran’s Economy

Document Type : Research Article

Authors

1 MA Student of Economics

2 Department of Economics/ Faculty of Economics, Management and Accounting/Yazd University

3 Department of Economics, Yazd University Yazd, Iran

10.22084/aes.2024.29605.3704

Abstract

The type of industries that grow the economy, based on their intensity of production factors, plays a crucial role in shaping income distribution within a society. Failure to consider the intensity of production factors in industries may result in a scenario where production grows while income inequality worsens. The primary objective of this study is to examine how variations in the value-added share of industries, based on production factor utilization intensity, impact income inequality in the economy of Iran. The research employs the generalized method of moments (GMM) and utilizes data from all 31 provinces of the country spanning from 2010 to 2019. Findings indicate that a proportional rise in the value-added share of labor-intensive and natural resource-intensive industries contributes to a decline in income inequality at the national level. Given Iran's significant abundance of labor and natural resources, these industries exhibit comparative advantages in line with the Hecksher-Ohlin theory. Consequently, prioritizing the nation's comparative advantages serves to enhance income distribution, aligning with the Stolper-Samuelson theorem. Thus, transitioning towards a market system mechanism over government intervention in price determination for production factors or industry selection not only preserves economic efficiency but also enhances income distribution compared to the present scenario. The government must provide direct financial assistance to individuals with low incomes and adhere to appropriate strategies for redistributing income via the taxation framework. By doing so, under the principles outlined in the second welfare theorem, it becomes feasible to attain a fresh optimal Pareto equilibrium, resulting in a more just allocation of income, all the while preserving overall efficiency.

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Journal of Applied Economics Studies in Iran

Articles in Press, Accepted Manuscript
Available Online from 16 September 2024

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